Key Man Insurance Essentials

For any small business, insuring the top people can be crucial
By Greg Brown Insurance, particularly life insurance, is a morbid subject for many, but nothing could be more catastrophic to your small business than the untimely death of a key employee. If life insurance seems like an obvious protection against lost income for your family, consider how your business might fare without you, a top manager or that salesperson who is bringing in most of the revenue.

Your insurance agent will be happy to talk to you about 'key man' insurance (and of course, covering the key women in your organization) and the conversation needn't be morbid at all. Many a small business has had to file bankruptcy on the loss of a central figure, a risk that isn't necessary and can be cheap to insure against.
 

Make sure you need key person insurance

The risk associated with a key employee is sometimes entirely a matter of their having borrowed big bucks with a personal guarantee. Although credit insurance is usually unnecessary and expensive, if you already have it, key man insurance may be redundant.
Try: The U.S. Federal Trade Commission has a good explanation of the definitions and risks of credit insurance.

Find and compare policies and costs on the Web

Get a quick overview of your likely costs through online quote services.
Try: Look to Insure.com, Quickquote.com and Insweb.com. Ameritas sells insurance with no commission and is worthwhile for spot comparisons.

Calculate carefully the full impact of your potential losses

Normal life insurance coverage is usually bought at a multiple of personal income. But you won't have the luxury of investing and drawing interest if creditors are barking for payment and revenue is falling fast. Consider not only the person's contribution but the cost of finding their replacement and any contractual payouts due their survivors, like continued or deferred pay, as well as potential lost business.
Try: If you don't have an accountant or already track the value of your business, this online calculator can give you a quick view of the risk you are insuring. Bplans.com also has several good online calculators, including one for cash flow. Although for personal term life, Accuquote has a good needs calculator that will print a chart, too.

Consider how the loss of a key employee affects ownership

One of the often overlooked impacts of a death in the business is the question of ownership. Always get eventualities put into writing for all of the owners. Key man insurance can help finance the buyout you might want to effect if someone with a big chunk of the business passes on.
Try: Get a grip on the basics of buy/sell agreements at the legal site Nolo.com.

• Executives at large companies are sometimes surprised to learn that their dear employer has essentially bet on their demise. Get ahead of this issue by informing your key executives first.
• If you borrow or need venture capital, key man life insurance is probably going to be required by the lenders. This is particularly true if your company is highly dependent on a single product or service in development that only a few people in the company understand well.
• Along with life, consider tacking on disability coverage. If the person is unable to return to work, the impact on your company will be the same.
• Ask your agent about annually renewable term life, or ART. If you take insurance one year at a time, it can be cheaper, particularly for up to five years — like when a company is young and more dependent on individuals.